Document of The World Bank Report No: 71292 - MX RESTRUCTURING PAPER ON A PROPOSED RESTRUCTURING OF THE EFFICIENT LIGHTING AND APPLIANCES PROJECT TO THE UNITED MEXICAN STATES APPROVED ON NOVEMBER 23, 2010 July 19, 2012 ABBREVIATIONS AND ACRONYMS CFL Compact Fluorescent Lamp CTF Clean Technology Fund FIDE Fideicomiso para el Ahorro de Energía Eléctrica (Trust Fund for Electricity Savings) FTE Fondo para la Transición Energética y el Aprovechamiento Sustentable de la Energía, (FTE, the“EE Trust Fund�) GEF Global Environment Facility GoM Government of Mexico IBs Incandescent Bulbs IBRD International Bank for Reconstruction and Development KfW German Development Bank NAFIN Nacional Financiera RP Restructuring Paper PAD Project Appraisal Document PDO Project Development Objective SENER Secretaría de Energía (Ministry of Energy) UMS United Mexican States Regional Vice President: Hasan Tuluy Country Director: Gloria M. Grandolini Sector Director: Ede Ijjasz-Vasquez Sector Manager: Malcolm Cosgrove-Davis Task Team Leader: Ariel Yepez-Garcia i MEXICO EFFICIENT LIGHTING AND APPLIANCES PROJECT P106424 CONTENTS Page Table of Contents A. SUMMARY ............................................................................................................... 1 B. PROJECT STATUS ................................................................................................. 1 C. PROPOSED CHANGES .......................................................................................... 2 ANNEX……………………………………………………………………………………5 ii MEXICO EFFICIENT LIGHTING AND APPLIANCES PROJECT RESTRUCTURING PAPER A. SUMMARY 1. The purpose of this restructuring is to reallocate funds between components and to revise the percentage of expenditures financed, in order to improve project results. The project development indicators remain unaltered. There are no implications on the PDO, CTF transformational impact and CO2 reduction targets. Specifically the restructuring seeks to: a. Reallocate US$8.513 million from Component 1: Replacement of Incandescent Bulbs with Compact Fluorescent Lamps (CFLs) to Component 2: Incentives to Encourage the Replacement of Old and Inefficient Appliances in the Residential Sector under the IBRD Loan (7996-MX), as requested by Secretaría de Energía (SENER), through Nacional Financiera (NAFIN), in a letter sent on March 29, 2012 and b. Change the disbursement ratio of CTF funds and NAFIN funds from 60% - 40% to 90% -10% under the CTF Loan (TF 098062), as requested by NAFIN in a letter sent on May 10, 2012. 2. This is the second restructuring of the Efficient Lighting and Appliances Project. The first restructuring, approved on August 25, 2011 removed the Energy Efficiency Trust Fund (EE Trust Fund or Fondo de Transición Energética -FTE) as one of the signatories of the “Compact Fluorescent Lamp (CFL) Implementation Agreement� under Component 1 of the Project, and added a remedy in the United Mexican States (UMS)/International Bank for Reconstruction and Development (IBRD) Legal Agreement to ensure that the transfer of funds from the EE Trust Fund to the CFL Administrator (FIDE) occurs according to the revised CFL Implementation Agreement and the Operational Manual. B. PROJECT STATUS 3. The Mexico Efficient Lighting and Appliances Project was approved by the Board on November 23, 2010. The legal agreements for the IBRD and Clean Technology Fund (CTF) loans, and the Global Environmental Facility (GEF) Grant were signed on December 8, 2010. After two extensions, the IBRD Loan became effective on November 9, 2011 and the CTF Loan became effective on November 15, 2011. 4. Despite the delays in meeting the effectiveness conditions, the implementation of the Project is progressing well. a. Component 1 (US$55.00 million): The procurement process for the exchange of Incandescent Bulbs (IBs) for CFLs was completed in April 2011 and the contract between FIDE and the winning consortium was signed on May 10, 2011 for a total amount of US$46.48 million. The program exchanged 22.9 million IBs by CFLs on June 14th, 2012 (100% of the program target). 1 b. Component 2 (IBRD US$194.99 million, CTF US$ 50.00 million, GEF US$5.00 million): Out of the targeted 1.7 million appliances to be exchanged under Component 2, approximately 94% have been exchanged by May 2012. Disbursements for the IBRD loan for this component have been US$ 188 million, which correspond to 96% of the total (US$194.99 million) estimated at appraisal. Only 28% of the CTF resources have been disbursed. According to NAFIN, this low disbursement level is due to the delay in reaching effectiveness of the Project (achieved in November 2011) and the fact that NAFIN was using first a line of credit provided by KfW (German Development Bank) for the program. The US$ 5.00 million GEF resources have not been disbursed yet for the Guarantee Facility. c. Component 3 (GEF US$2.12 million): The Technical Assistance and Institutional Strengthening component has faced some delays on its implementation due to internal administrative problems in Mexico to disburse GEF resources through the EE Trust Fund. SENER is addressing the issue with the Ministry of Public Management (Función Pública) and it is expected that the implementation will start soon. C. PROPOSED CHANGES 5. Reallocation of funds between Components. The first proposed change is to reallocate US$8.513 million from Category 1 to Category 2 under the IBRD Loan (7996- MX) in the Loan Agreement as shown in the table below. This reallocation is proposed due to the fact that the contract for the exchange of IBs by CFLs resulted in a lower than anticipated cost. Therefore the savings under Category (1) are proposed to be used for additional vouchers under part 2 (a)(i) of Category 2. This reallocation will allow the exchange on an additional estimated amount of 71,000 appliances. (See annex with new target). Amount of the Proposed Percentage of Expenditures to Loan reallocation be financed Category Allocated (in USD) (inclusive of Taxes) (in USD) (1) CFLs under Part 1 55,000,000.00 46,487,000.00 100% of the Project (2) Vouchers under 194,998,436.50 203,511,436.50 100% of payments made by the Part 2(a)(i) of the Operator to Eligible Retailers Project for the payment of redeemed Vouchers. (3) Front-end Fee 626,563.50 626,563.50 Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07 (b) of the General Conditions. (4) Premia for Interest -0- -0- Amounts due under section 2.07 Rate Caps and Interest (c) of this Agreement. rate Collars. TOTAL AMOUNT 250,625,000.00 250,625,000.00 2 6. Change of the percentage of expenditures for the CTF Loan under Component 2. NAFIN’s on-lending rate for the program is based on an agreed proportion of CTF funds. However, the delay in project effectiveness resulted in NAFIN disbursing a higher fraction of its own funds early in the program, without benefit of blending the lower cost CTF funds. The proposed change in percentage is needed to compensate for this fact, and allow the CTF disbursements to reduce NAFIN’s cost of capital and mitigate the risk of financial loss on the Project. At appraisal, the team proposed the 60%-40% disbursement ratio of CTF versus NAFIN funds to ensure that there was an adequate leverage of local funds that would contribute to address the barriers (described below) that would allow the program to reach a large scale. Due to delays in reaching effectiveness of the CTF loan, NAFIN has already contributed more than the originally anticipated local financing for the component. The following table (as included in the PAD and CTF Legal Agreement) specifies the percentage of expenditures to be financed for Eligible Expenditures for the CTF Loan and the proposed change. The proposed increase will not result in Bank financing of expenditures financed by any other party. Amount of the Percentage of Proposed Percentage of Loan Allocated Expenditures to be Expenditures to be Category (expressed in Financed Financed USD) (inclusive of Taxes) (inclusive of Taxes) (1) Credits 50,000,000 60% of amounts paid by Up to 90 % of amounts the Operator to Eligible paid by the Operator to Retailers. Eligible Retailers. TOTAL 50,000,000 50,000,000 50,000,000 AMOUNT 8. Moreover, the team considers the justification for the need of concessional CTF funds at appraisal does not change with the proposed restructuring. On the contrary, due to delays in reaching project effectiveness, CTF funds were not available at the beginning of the project and NAFIN continued operating the program at its own risk in the expectation that the CTF resources would be received. CTF resources address two main barriers that constrained the achievement of this scale of intervention. First, FIDE (the organization mandated by the Government of Mexico to implement the program) did not have sufficient institutional capacity to increase project scale from pilot to a large-scale operation. Second, the poor credit profile of low-income consumers was perceived as an above-average lending risk by NAFIN, as a result of which a risk premium was required for funding at this scale. The concessional element of CTF funding, blended into the overall financing package, addressed these two barriers in the following way: a. First, NAFIN was able to transfer the benefit from the reduction in its cost of capital by providing an additional 1 percentage point spread of interest payments to FIDE. 3 b. Second, the reduction in the cost of capital reduced the hurdle rate that needed to be cleared in NAFIN to go forward with the operation. The reduction in the discount rate reduced the risk of financial loss on the Project. 9. There are no implications on the PDO, CTF transformational impact and CO2 reduction targets. The Greenhouse Gas Emissions will not decrease because the target to substitute refrigerators and air conditioners will be higher. The CTF co-financing will remain at the same level of US$50 million and the ratio of funding from other financing sources to CTF does not decrease from the original leverage ratio. The original leverage ratio was 60/40 (CTF/local financing) equivalent to US$50 million CTF and US$33.3 million local financing. The Mexican government was using their own funding and a line of credit provided by KfW for financing the replacement of inefficient equipment before using CTF funds due to the delay in reaching effectiveness of the Project. As of today the government has financed almost US$300 million, a much higher amount than the US$33.3 million initially planned. 10. The proposed change in expenditures of CTF funds has been discussed and approved by the CTF. 4 ANNEX Changes to the result framework as a result of the reallocation of funds between components Original end target New end target Result Indicator (Cumulative) (Cumulative) Number of 1,700,000 1,771,000 appliances replaced GWh saved from 3,600 3,750 appliance replacement Carbon Dioxide 1,851,000 1,920,000 Emission Reductions from appliance replacement Date June 30,2014 June 30,2014 5